QUESTION ONE

a$)$ Montchair produces $1500$ different products, including Forest Green Carnival. Its Standard cost

of shs $290,000$ per ton is derived from:

$$ Union wage rates for labour costs $($ Pattern bargaining$$ virtually assured comparable labour

costs among the major union firms, all of which were unionized$)$;

$$ Standard yield rates for all manufacturing steps, based on latest performance measured

against long$-$standing norms at the Montclair mill;

$$ Current market prices for all purchased components;

$$ Generally accepted industry procedures for building the $$normal$$ cost of scrap into the

standard cost, after deducting the offset for the market value of the scrap generated.

The standards were updated annually for changes in purchase prices, process flows and yield

targets. With more than $1500$ products manufactured in the mill, more frequent updating was

deemed unfeasible.

Manufacturing management accepted that the standard cost represented best practices of the mill

and thus was an appropriate basis for monitoring monthly performance. Standard costs were also

helpful to simplify calculating the month end cost of goods sold and the ending inventory for

financial statements. Updated only once a year, the standard cost was stable from month to month.

Management viewed this stability as a positive feature in monitoring monthly performance against

the annual plan.

Questions

i$)$ Why do some companies find it inappropriate to implement a standard costing system? $(5$

Marks$)$

ii$)$ Explain reasons why Activity Based Costing method compared to Standard costing system

$(5$ Marks$)$

b$)$ Illustrate the importance of determining Margin of Safety while determining break$-$even point

$(5$ Marks$)$

QUESTION TWO

Using appropriate management accounting model demonstrate processes a prudent manager

should undertake in making a decision in selecting a project $(4$ Marks$)$

b$)$ You have been give the following investment decision making matrix:

States of Nature

Security Growth Medium Growth No Change Low

Bonds $15\%11\%10\%6\%$

Stocks $21\%16\%12\%-2\%$

Deposit $11\%11\%11\%11\%$

i$)$ Using appropriate computation, recommend which security an aggressive investor $($Risk taker$),$

will invest in$.(4$ Marks$)$

ii$)$ Using appropriate computation, recommend which security a conservative investor will invest

in $(3$ Marks$)$

iii$)$ Using appropriate computation, recommend which security a middle ground investor will

invest in if coefficient of aggressive investor is $0\mathrm{.}6$ and conservative investor is $0\mathrm{.}4(4$ Marks$)$